The general supply function for new housing in Miami is estimated to be Qs=96+2P-10Pl-4Pk where P is the price per square foot of new housing in Miami, PL is the average hourly wage rate for construction workerw, and PK is the price of capital (as measured by the average rate of interest paid on loans to home builders). Os is measured in units of 1,000 square feet per month.
Does if make sense for PL and PK to have negative coefficients in the general supply function? Explain why or whay not.
To understand whether it makes sense for PL (average hourly wage rate for construction workers) and PK (price of capital) to have negative coefficients in the general supply function, we need to consider the economic relationships these variables have with the supply of new housing in Miami.
In economics, the coefficients in a supply function represent the relative responsiveness or sensitivity of quantity supplied to changes in each variable. A positive coefficient indicates a direct relationship, meaning an increase in the variable will lead to an increase in the quantity supplied, while a negative coefficient indicates an inverse relationship, meaning an increase in the variable will cause a decrease in the quantity supplied.
In the case of PL (average hourly wage rate for construction workers), it is reasonable to expect a negative coefficient in the supply function. An increase in the average hourly wage rate would increase the overall cost of constructing new housing, which would subsequently reduce the profitability for builders. As a result, builders may reduce their quantity supplied to maintain their profit margins. Therefore, a negative coefficient for PL suggests that an increase in the average hourly wage rate would lead to a decrease in the quantity supplied.
Similarly, for PK (price of capital), a negative coefficient also makes sense. If the price of capital, as measured by the average rate of interest paid on loans to home builders, increases, it becomes more expensive for builders to borrow money. This higher cost of capital raises the overall cost of construction, reducing the profitability for builders. Hence, an increase in the price of capital would result in a decrease in the quantity supplied, justifying a negative coefficient.
In summary, it makes economic sense for PL and PK to have negative coefficients in the general supply function for new housing in Miami. Increased labor costs (PL) and higher capital expenses (PK) both raise the overall cost of construction, reducing builder profitability and causing a decrease in the quantity supplied.
Yes, it does make sense for PL and PK to have negative coefficients in the general supply function for new housing in Miami.
The negative coefficients on the average hourly wage rate for construction workers (PL) and the price of capital (PK) suggest that an increase in these variables would lead to a decrease in the supply of new housing (Qs).
Here's why:
1. Average Hourly Wage Rate for Construction Workers (PL): A negative coefficient on PL indicates that as the wage rate for construction workers increases, the supply of new housing decreases. This is because higher wages for workers increase the cost of production, making it less profitable for builders to supply new housing. It becomes more expensive to hire workers, which leads to a decrease in the quantity supplied.
2. Price of Capital (PK): Similarly, a negative coefficient on PK suggests that as the price of capital (measured by the average rate of interest paid on loans to home builders) increases, the supply of new housing decreases. This is because higher capital costs make it more expensive for home builders to invest in new projects, reducing their incentive to supply new housing. The higher interest rates increase borrowing costs and decrease the affordability of financing new construction projects.
In summary, the negative coefficients on PL and PK in the general supply function indicate that higher labor and capital costs act as disincentives for builders to supply new housing in Miami, leading to a decrease in the quantity supplied.